In the world of business, when
you invest more capital, the more potential of gain or loss you get. For
example, there is a market share that valued $10. There are two possibility of
this share in the future. Its value can be increased above $10, or can be
decreased below $10. Depending on your analysis, you can get a capital gain or
capital loss. The more you purchase the stock, the more you can get capital
gain or capital loss. Let’s take a look at the condition when you purchase more
or purchase less if the share value increase to $25:
Share Value at Purchase Price
|
Share Value at Sell Price
|
Capital Gain
|
Gain if Purchase less (100 Shares)
|
Gain if Purchase More (10000 Shares)
|
$10
|
$25
|
$15
|
$15 x 100 = $1,500
|
$15 x 10,000 = $150,000
|
I use the example when purchase
less at 100 shares and 10,000 shares for purchase more. When you Purchase 100
Shares, you only get $1,500 capital gains, and you get $150,000 if purchased
10,000 shares. Here lies where Risk-Return Trade Off show off. The value $10
shares has potential to increase or decrease. When you believe that you can get
more and purchase more you also purchase the risk in one bucket. When the value
increase to $25, you get 150% gain. Percentage of this return remain unchanged instead of risk,
while the amount you spent makes difference on your account.
Let’s take a look at the
condition when you purchase more or purchase less if the share value decrease
to $5:
Share Value at Purchase Price
|
Share Value at Sell Price
|
Capital Loss
|
Loss if Purchase less (100 Shares)
|
Loss if Purchase More (10000 Shares)
|
$10
|
$5
|
$5
|
$5 x 100 = $500
|
$5 x 10,000 = $50,000
|
I use the example when purchase
less at 100 shares and 10,000 shares for purchase more. When you Purchase 100
Shares, you only lost $500 capital loss, and you lost $50,000 if purchased
10,000 shares. Here lies where Risk-Return Trade Off show off. The value $10
shares has potential to increase or decrease. When you believe that you can get
more and purchase more you also purchase the risk in one bucket. When the value
decrease to $5, you lost 50% of your account. Percentage of this return remain
unchanged, while the amount you spent makes difference on your account.
Depending on how much you have
control on your finance, you can change the amount of gain or loss in your
account. Risk-Return Trade off just one of narrow mindset. You can also minimize
the risk with much knowledge. Financial Risk is something that inevitable, but
we can always improve our account with much knowledge.
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